Tuesday, February 17, 2015

A lazy central banker's guide to escaping liquidity traps

For lazy central bankers, this post describes three lite strategies for getting interest rates below the zero lower bound. Rather than requiring drastic action, these methods can be quickly deployed without having to spend too much energy—leaving plenty of time for the afternoon squash game.

1) Let's start at the beginning. What is the zero lower bound? If a central bank reduces interest rates below 0% then banks will rapidly convert all their central bank deposits into cash. No point accepting a -2% return if you can get 0%, right?

2) The zero lower bound is a problem. From time to time, a central bank may need to venture into negative territory to hit its monetary policy targets. Cash impedes the smooth descent into negative territory.

3) We already have a few go-to plays for dealing with our inability to get below zero: quantitative easing, forward guidance, and fiscal policy, each with its own set of warts. While quantitative easing has become a popular tool over the last few years, theory tells us that purchases are irrelevant at the zero lower bound. Promising to keep rates at 0% for longer than is prudent has also been used by a few central banks, notably the Bank of Canada. Unfortunately the market finds forward guidance confusing and may see little credibility in it, given the fact that the central banker who initiates the promise may not be in office to carry it out. This problem is called time inconsistency. And lastly, while fiscal policy may be a good way to evade the zero lower bound problem, it hinges on flaky political processes and arduous negotiations.

4) A more direct way to get around the zero lower bound problem may be necessary. Our lazy central banker might have to make alterations to the very nature of cash itself.

5) A sure-fire way to remove the lower bound is an outright abolition of cash. It gets around the time inconsistency problem and the flakiness of politics. But abolishing cash is a drastic step. Banknotes serves a role in protecting privacy and are popular with the unbanked. Abolish cash and you hurt both. Given the degree of preparation and effort needed to remove cash, and the political wrangling this option would require, a lazy central banker may want to take a pass.

6) Rather than removing cash, just harm it. Silvio Gesell's stamp tax, for instance, attacks cash's pecuniary return. In this spirit, Miles Kimball's crawling peg between electronic currency and paper currency burdens those who own cash with a capital loss. The crawling peg banishes the zero lower bound—without requiring the drastic step of immediately removing all banknotes. It's an elegant solution, you can read the details here (pdf).

7) There are a few drawbacks to a crawling peg. Driving a wedge between paper and electronic currency creates two different sets of prices at the till, one for deposits and the other for cash. A chocolate bar, for instance, might have a sticker price of $1.00 in electronic money, but require a cash payment of $1.05. This will be confusing and inconvenient for shoppers, necessitating an expensive and costly education campaign by our central banker. According to Kimball, instituting a crawling peg requires that a nation enact a unit of account switch. Prices must be set in terms of electronic currency, not paper currency, otherwise the central bank will lose control over the price level. While a switch in standards is by no means impossible, it does require time and effort.

8) Which finally gets us to our lite strategies for lazy central bankers. These options don't suffer from time inconsistency or flaky politics. They get us below zero without requiring the abolition of cash, nor do we get two different sets of prices at the till, nor do we need a nation to switch to a new unit of account. In short, if enacted, they'd keep our system pretty close to the current system.

9) Laziness isn't without a cost. Unlike the abolition of cash and Miles Kimball's crawling peg, the lite methods don't free us entirely of the lower bound. They only soften it up a bit, re-situating the bound a few percentage points lower. This buys room for central banks to cut rates, but not infinite amounts. If extremely negative rates are necessary, say -6%, then there is no lazy option: best get off the couch and go with a full-out crawling peg.

10) There are a number carrying costs on cash holdings, including storage fees, insurance, handling, and transportation costs. This means that a central bank can safely reduce interest rates a few dozen basis points below zero before flight into cash begins. The lower bound isn't a zero bound, but a -0.5% bound (or thereabouts).

11) The various lite strategies all exploit the fact that differences in carrying costs among the various note denominations mean that banknotes are not naturally fungible. Put differently, bills aren't perfect substitutes for each other. Large denomination notes, say $100 bills, incur lower storage and handling fees than small denomination notes like $10s. After all, a hundred-thousand $10 bills (worth $1,000,000) take up ten times more storage space than a ten-thousand $100s (also worth $1,000,000). However, a central bank renders the two types of notes equivalent by offering to convert pesky low denomination $10s into sleek large denomination $100s at no cost to the owner. This means that the public can avoid the nuisances of small denomination note storage, for free. So at any point in time the note-owning public is bearing the carrying cost of the highest denomination note, not the lowest ones.

12) To get a bite, the following three lazy techniques all boost the carrying cost of cash.

13) They do so by interfering with the traditional smooth switch out of small denomination notes and deposits into large denomination notes afforded by a central bank. The effect is to put an end to banknote fungibility. The public, previously sheltered from the hassles of holding pesky low denomination notes, must now bear those costs, while being barred from racing into sleek high denomination notes.

14) By implementing any one of these lite techniques, the additional carrying costs now imposed on cash remove any incentive to convert increasingly negative yielding deposits into banknotes. A central bank that had previously reduced its deposit rate to, say, -0.5% before finding itself snug against the lower bound, will now be able to reduce its deposit rate to a much lower level, say -2.5%, without fear of mass flight into cash.

15) The first method a lazy central banker should consider is the abolition of large denomination notes. A central bank issues a proclamation giving people one month to bring in all $100s for conversion into ten $10 bills. Any large denomination notes remaining in circulation after one month will be disavowed. Once all high-value denomination are demonetized, the market clearing carrying cost on cash holdings will no longer be the superior rate on $100s, but the much heftier one on $10s. The expected return on cash holdings having been diminished, a central banker who had previously found him or herself stuck against the lower bound now has room to go lower without fear of mass flight into cash.

16) Even with the $100 having been abolished, the remaining low denomination notes in circulation can continue to serve a role in protecting privacy and serving the unbanked.

17) The second method involves closing the high denomination "conversion window." Specifically, a central bank ceases converting both low denomination notes and deposits into high denomination notes. The only window the central bank will keep open is between deposits and low denomination notes. This means that anyone who converts deposits into cash can now only get pesky small notes, forcing them to bear the higher carrying costs of $10s rather than the minimal inconveniences of sleek $100s. A central bank can now cut its deposit rate much deeper into negative territory than before since depositors are far less likely to flee into bulky cash.

18) If we close the conversion window, won't those who hold negative-yielding deposits and low denomination notes simply trade them for zero-yielding high denomination notes on the secondary market? Sure, but the opportunity will be a fleeting one. The closing of the conversion window effectively freezes the quantity of high denomination notes in circulation. The price of $100s will immediately rise to a premium over bulky low denomination $10s and negative-yielding deposits. After all, $100s impose much lower carrying costs than the other two instruments. This premium removes any incentive to flee deposits and low denomination notes.

19) Won't the public suffer the inconveniences of having two different sets of prices? Not really. Rather than having an electronic currency price and a cash price (as in point 7), the closing of the high denomination conversion window will create a combined electronic/low denomination price and a high denomination price. The public, which almost never transacts in high denomination $100s anyways, can conveniently ignore the high denomination price level.

20) Nor does our lazy central banker need to worry about switching standards. Given that consumers only rarely pay with high denomination notes, it's highly unlikely that retailers currently set prices in terms of $100s. In fact, even now retailers often refuse to accept large value notes. It's likely that we probably already live in a world with a low denomination/electronic currency standard.

21) Which brings us to our third method: vary the conversion rate between low denomination notes/electronic currency and large denomination notes. Central banks currently allow free conversion between deposits, low value notes, and high value denominations. The idea here is to keep the conversion window open, but levy a fee, say three cents on the dollar, on anyone who wants to convert either deposits or low denomination notes into high denomination notes. Conversion between low value notes and deposits remains free of charge.

22) A central banker can now safely guide rates to a much more negative rate than before, say to -2.5% rather than just -0.5%. Prior to instituting a conversion charge, the public would have fled from deposits to cash at such low rates. Now, while people can still convert deposits at no cost into low denomination notes, this offers them no real advantages given the high carrying costs on such notes. And flight into high value notes is forestalled by the conversion fee.

23) As with the second lite method, the third creates two different sets of prices: one for low denomination notes/deposits and one for high denomination notes. But this doesn't matter, see point 19. Nor do we have to switch standards, see point 20.

24) The main difference between the second method and the third one is that the exchange rate between high denomination notes and low denomination notes/deposits is allowed to float in the former versus being fixed under the latter.

25) The third lite method is akin to Miles Kimball's crawling peg, except that the conversion penalty is set on high denomination notes only, not cash in general. But if we steadily widen the peg so that it includes mid-value denominations, and then add small denominations, then the third lite technique isn't so lite anymore. It has basically become Kimball's peg. At some point along that transition, we start to inherit the inconveniences of the crawling peg (see point 7). For instance, the dual price level becomes much more inconvenient, especially once $10s (and lower) are included. However, the advantage is that we can now push rates much deeper into negative territory.

26) Which means its possible to incrementally transition from a lite program to an all-out option like a crawling peg or total abolishment of cash. Lazy central bankers may prefer to stick their toes in the water before jumping all the way in.

27) By the way, I've mentioned the first lite technique here, here, here, and here. I mentioned the second lite technique here. I haven't mentioned the third before.

28) If I was a lazy central banker, of the three lite programs I'd be partial to the second one; the closing of the high denomination conversion window. Removing high denomination notes from circulation would probably have messy political implications and draw the public's wrath. Levying a fee is an assertive, some might say aggressive stance necessitating the creation of new processes and administration expenses. Simply closing the $100 window seems like it would take the least amount of effort. It doesn't require that any new infrastructure or the decommissioning of existing machinery. As for the pricing of high denomination notes, this gets outsourced to the market.

The problem right now is that the yield on cash and central bank deposits is too high, thus deflation. We need to reduce that yield somehow, whether it be the various lite techniques above or something else. I really don't think asset price bubbles should be used as a bogey man to prevent a basic CPI target from being hit.

OK, but what could that mean? Normal people will observe their bank savings evaporate even faster and may feel that they are being robbed by the financial sector and its central bank, which will not encourage them to increase their spending. And people that are lucky enough to own substantial amounts of bonds and shares, and business owners in the real sector will see the value of their net assets surge. But they too are well aware that is just the result of increasingly desperate manipulations of the central bank, and they will feel unsafe and not eager to oncrease their spending and investment much. And, finally, the bankers will see this cheap money as an opportunity to further increase lending for the purpose of speculation, to blow even larger asset bubbles. And finally, the whole game will end in the bursting of the mother of all bubbles, and central bankers and the financial sector will lose what little remained of their credibility. This is not a game!

Let's keep the discussion to the specifics of the above plan. Specifically, do you think that the non-fungibility of various note types is a sufficiently large friction to allow a central banker to reduce rates further into negative territory, without flight into cash?

Well, I can only guess about that of course. Just a quick thought. I imagine that if you would lower rates to below, say, -1%, all cash would start to disappear, not only larger bills. So, my answer would be that this would not be a sufficiently large friction.

On the other hand, if in such a situation the central bank would not provide extra cash, I could imagine that the value of cash would rise to a level above that of of electronic money, with the difference being dictated by the amount of negative interest on electronic money.And thus part of it would remain in circulation.

You don't understand what I mean. I hope this is more clear (sorry if my english is not clear enough): - people will start replacing their deposits by cash, and then store this cash away;- this will cause a shortage of cash (assuming that the central bank does not provide extra cash in order to be able to reach its target ate without all deposits disappearing);- due to the shortage of cash, the price of cash will increase relative to the price of deposits, until some new equilibrium is reached.

But JP, in response to your article http://jpkoning.blogspot.ca/2014/12/speculative-markets-are-not-black-holes.html

It seems to me that you may be making a mistake.

You write: “In a nutshell, newly-created money (or already existing money) that flows into stock and bond markets does not enter a financial black hole. For every buyer there is a seller. By definition, money will flow away from the market on which it is spent just as quickly as it enters it.” And you write “So in sum, contra Faber money and credit cannot be held up inside speculative markets.

I directly believe this is all true. But then you write “It doesn't take long for it to be spent into the real economy.”

But why would this be the case? The money that is received by the sellers is just an asset that has been traded for another asset. There is no income earned. And thus, why would this money be spent in the real economy? Can you give me a plausible explanation?

As for your comment at 10:47, as a matter of policy central banks always provide cash on demand. If they cease to do so, then the price of cash will increase once rates go negative, as you point out. And if they allow low denomination cash withdrawals but not high denomination ones, then you get my method #2. (Curious: did you even read my post? You give no evidence of having done so)

JP, you are right. I did not read this specific post, that is, not all of it. But I never said I did, I just answered your question. I often read your blog and consider it one of the more informing on the subject, as far as I can judge (not being an insider).

Normally, I never respond to your blog, but somehow this article struck me. I have noticed that you are being read by "important" economists. And in my opinion, that brings some responsibilities, if you like it or not.

The point that I try to make is that this is not some kind of intellectual game. We are in the midst of a serious crisis, and to my opinion, it is the financial sector that brought us there. And I sincerely ask myself if ideas like this are goiing to solve this problem instead of making it much worse.

Having said that, I will post my question on the article "speculative-markets-are-not-black-holes" and hope you will answer it there.

A slightly tricky aspect is that this should ideally be sprung as a complete surprise, since otherwise the supply of $100s would balloon in anticipation, increasing the central bank's losses (which could be considerable: $1 trillion of $100s x 3% = $30 billion).

The ideas seem worthy. But realize that high value service people (home repair, plumbers, HVAC, roofers, etc.) often work in cash in $100s. Some way to ease a transition for them would be a good addition.

The obvious way to avoid the ZLB is to stop targeting interest rates. Why wouldn't the "lazy" central banker simply switch to NGDP level targeting? I find it hard to get my arms around all of the things that must change to impose negative nominal rates on cash holders, but it's easy to see how the Fed can drive NGDP to target without changing anything beyond its own monetary policy.

Kenneth, you can't just announce an NGDP target and expect to hit it without a tool to that gets you there. At the zero lower bound, the traditional tools stop working. Purchases become irrelevant, and the interest rate lever gets stuck. The methods I've listed above are a way to loosen that lever by a few percentage points, thus allowing a central banker to hit their NGDP level targets.

I am always surprised when sophisticated economists act as though the Fed can't place NGDP anywhere it wants. NGDP is a purely nominal quantity, and the Fed is master of the nominal universe.

NGDP is coming in a little low? Getting frustrated about missing your targets quarter after quarter? How about offering to buy unlimited quantities of yen at $1 each until NGDP reaches its target level. Or Euros for $100 each. And promise that those purchases will never be undone, that the monetary base expansion is permanent. What do you think that would do to NGDP?

Way too many people seem to have concluded that since inflation has been below target for 24 quarters running, that the Fed must be powerless to raise it. Nonsense, the Fed can get whatever price level it wants simply by committing to do whatever it takes to get it, and following through on that commitment. For example, if the Fed had switched to PCE level targeting in 2008, and then fallen short in 2009, and said okay folks, we are not kidding, here is our new PCE level target (2% higher than the last PCE level target even though we fell short), and here's the monetary base expansion that's permanent, higher inflation is right around the corner, what do you think that would have done to the market's inflation expectation and 30-year treasury yields? By driving inflation expectations higher and keeping nominal rates at zero, the Fed would create a -4% or -6% real interest rate climate just like that. If you don't think that would increase spending at the margin, then I'm not sure what else to say.

In other words, the reason the Fed has been failing to hit its inflation target is because it isn't trying to hit it. It has other priorities. For example, it links QE program duration to unemployment levels. And then it tapers QE3 while still under its inflation target. Between those sorts of actions and the endless hawk squawking, the Fed's inflation target has lost credibility. Look at 30 year bond yields! And I'm not the only one who has concluded the Fed is just kidding about its inflation target. See David Beckworth (http://macromarketmusings.blogspot.com/2014/12/tinkering-on-margins.html), and Mark Thoma (http://economistsview.typepad.com/economistsview/2014/03/the-two-percent-ceiling-for-inflation.html).

The Fed can achieve anything it wants to in the nominal economy. Today, it is using the wrong instrument in the wrong way in pursuit of the wrong target. The room for improvement is breathtaking. (Well, until you compare the Fed to the ECB anyway.) We don't need negative nominal interest rates. All we need is the right target (NGDP, not price level) targeted the right way (level targeting, not growth rate targeting) using the right instrument (monetary base expansion, not interest rates).

Ken, I've written before about how the Fed has "control over the nominal universe". I've called it a central banker's Archimedean lever, whereby if you "give any central banker full reign, they'll be able to increase NGDP by whatever amount they desire."

As for the idea that purchases stop working at the ZLB, it is mainstream. Have you tried to engage with what folks like Woodford and Wallace have to say on this issue?

This post isn't about NGDP targeting. Do you think that the non-fungibility of various note types is a sufficiently large friction to allow a central banker to reduce rates further into negative territory, without flight into cash? Please contribute your brain power to explaining why it won't do the specified job rather than talking about another subject :) I'm curious what readers come up with.

JP, thank you for the comment, and especially to the link to your August 2013 post. That is a great explanation of the monetary authority's ability to move NGDP even at the ZLB, honestly one of the best I've seen. I'll add it to my arsenal.

> Please contribute your brain power to explaining why > it won't do the specified job...

I've had a hard time gearing up my brain to really think about negative nominal rates because I am interested only in practical solutions, and I believe negative nominal rates are impractical because you are never going to convince the electorate that it makes sense for banks to charge them interest on their own deposits, and/or do other things to make it "expensive" to work with paper currency (crawling pegs, deposit fees, whatever). The left will hate it as a giveaway to the banks, and the right will hate it as a state power grab, and they're both wrong, but it doesn't matter, your idea is dead. I believe NGDPLT has a real chance of support from both the left and the right (except for the Austrians/libertarians, but they're a smallish faction). That's why I funded the new Program on Monetary Policy at Mercatus. Unfortunately MM'ers are slowing down the building of the needed consensus by antagonizing Keynesians, but I believe that rift can be healed through a New Monetary and Fiscal Policy Consensus that broadly consists of NGDPLT plus automatic fiscal stabilizers if NGDP drops too much below target for too long. I believe that direction is a huge improvement over current policy and is also achievable. So that is the direction I am pushing.

That said, I am seriously prepared to fund any credible effort to improve monetary policy as practiced by the world's major central banks. I am open to doing more, including in the negative-nominal-rate area. It will take some convincing to convince me that the negative-nominal-rate direction is practical, but I do recognize that if you could pull off negative nominal rates, it would be a huge help in stabilizing the nominal economy. if you can see the path to make negative nominal rates a reality, and think some funding could advance us down that path, please let me know, kjd@duda.org.

Thanks, JP. I would love to be wrong about negative nominal rates because if they can be made to work, they would be such a powerful tool to fight a positive money demand shock like the one that knocked us off our feet in 2008. I'll be sure to keep my eyes on this and see if I can connect with Miles.

Thanks, JP. I love your explanation (in "the Market Monetarist Smell Test") of why outsourcing forecasting to a predictions market is such a win. I agree with you that NGDP is just one possible nominal aggregate target, but it seems like a pretty good one, and certainly better than targeting inflation, so I'm surprised you're not more positive on it. Do you think there is a (much) better target? (I sort of like aggregate nominal labor compensation per capita myself, but NGDP is probably very nearly as good.)

I think it's downright strange that you are so negative on the monetary base size as the instrument. Don't most people agree that in the long run, the price level is determined by the size of the monetary base (relative to the size of the economy)? Given that, doesn't the (expected future) size of the monetary base drive people's expectations of future prices, i.e., inflation expectations, which in turn determine real rates, which in turn drives spending, which drives NGDP? Granted that's a lot of "in turns", but that's what the prediction market is for --- to get the details right, to tell the Fed how big the monetary base will have to be to get inflation expectations to the point needed to hit the Fed's NGDP target for this year.

But I apologize, I'm just repeating myself. I agree that negative nominal rates would be a powerful tool if they can be made to work. But given that no one knows how negative they need to go to do the job, we don't know if there is a set of politically feasible changes to the US payment system that will prevent people from escaping to guaranteed 0% nominal return assets (cash) if a -10% or -20% nominal return on central bank deposits turns out to be necessary to maintain aggregate demand.

But you have certainly inspired me to think harder about it. Thanks again.

"Don't most people agree that in the long run, the price level is determined by the size of the monetary base."

Not when a central bank pays a competitive rate on deposits. Given a competitive rate, monetary base expansions don't do anything since deposits aren't being debased in any way. At this point, the way to drive NGDP is to reduce the deposit rate, since this debases deposits by reducing their return.

"From time to time, a central bank may need to venture into negative territory to hit its monetary policy targets."

Why would venturing into negative territory stop the downward trend in the funds rate? What is causing the downward trend in cash rates over the last few decades? Maybe you don't care if you can assume you can just keep going negative. At some point nominal GDP growth goes negative though and that would seem to accelerate the trend rate of decline in the cash rate. Where are we going with this?

I'm not sure if a fall from 2% to -2% is any worse than a fall to 6% to 2% for life insurers. In other words, they always suffer when rates decline, but somehow they have been able to honor past contracts.

The problem is that the cost of holding cash is not well-defined, and you would create space for someone to go into the cash-holding business. 2.5% cost to hold a thousand dollars for a year might look reasonable; but if you needed a hundred billion held, don't you think you could do it more cheaply than 2.5 billion? Someone will go into business with a warehouse just down the road from the mint, stacking up pallet-loads of fresh-printed $10 bills; and they'll gladly accept your excess reserves at the Fed, convert them to 10's and throw 'em on the pile, for 1% interest or whatever. So your lower bound becomes the operating cost of the lowest-cost warehouser, and I'm not convinced that it would be low enough to matter.

Effectively, yes. Right now I'm pretty sure the operating cost of cash storage is high since there is very little demand for the product and no reason to innovate. Entrepreneurs might start building warehouses out in Iowa to store $10 bills if interest rates go to -3.5%, charging customers say 3% for the service. If the costs of running the warehouse are 1%, our entrepreneur enjoys a 2% return each year. But they'd have to be pretty sure that rates are going stay at extremely low levels for more than a few years if they're going to commit that sort of capital. Without that sort of guarantee, I don't see the competing down storage operating costs to minimal levels.

Quick question: Has Scott Sumner changed his stance on imposing a penalty on excess reserves? Recently, after clicking a few links, I ended up on Scott's 2009 open letter to Krugman. Under the point "Easy Reforms," he wrote:

"Eventually I will get to quantitative easing, but there are some even easier steps that could make the problem much more manageable, without incurring the risks of highly unconventional policies. One easy step would be to stop paying interest on reserves....

... why not go one step further and charge an interest penalty on excess reserves? That would end the current problem of banks treating reserves and T-bills as near perfect substitutes. Yes, it wouldn’t solve that problem with respect to cash held by the public, but so far most of the hoarding of base money has been done by banks.... I don’t know if the interest penalty idea would work, but the Fed should certainly consider it."

http://www.themoneyillusion.com/?p=349

After Krugman wrote a dismissive response to the letter, Sumner replied in the NYT comments:

"I still haven’t gotten an answer on why my interest penalty idea on excess reserves wouldn’t work (from any major economist, not just Krugman.)"

I still feel the same way--nobody in the monetary econ blogosphere*** seems to be pushing this idea nowadays, and I don't understand why they aren't. I only skim Sumner's blog every few days, but I get the sense that he also has become a lot less enthusiastic about the penalty idea in recent years, despite being quite supportive of it in the early days of his blog (in fact, his FAQ still includes the following: "The Fed should stop paying interest on excess reserves, and if necessary should put a small interest penalty on excess reserves. This would encourage banks to stop sitting on all the money that has been injected into the system.")

As I said, I don't recall seeing the penalty idea at all in Sumner's posts over the last few years (or Glasner's, for that matter). Any thoughts on what accounts for its disappearance and absence?

*** Numismasphere? Perhaps another reader can think of a more elegant term.

Ever since Miles started blogging I think Sumner probably retrenched to focus purely on NGDP targeting and the quantity of the base.

Here's something more recent:

http://econlog.econlib.org/archives/2015/01/central_banking.html

"Nonetheless, it is probably impossible to pay negative interest rate on currency. Nor do I think it is feasible to make it so that currency is no longer a medium of account (as Miles Kimball proposed.)"

(...which was incidentally also a reply to my idea of removing large denomination notes, although I'm not sure what Scott was trying to say.)

So Sumner probably sees some positive benefits to reducing interest rates into negative territory, but sees this potential as bounded by the existence of 0% cash. Nor does he think it likely that Kimball's plan can work given the necessity of a medium of account switch... which is a weak argument. Switches are costly, but not impossible.

Right, I assumed it went without saying that Kimball endorses negative rates. I was referring to the other big-name monetary econ bloggers.

Thanks for the link, but I agree with the comment you left there--I don't really get Sumner's point. As you outlined above, removing large denomination notes would impose a de facto negative rate on currency in the form of storage and handling costs. Does Scott disagree? It would also clear the way to charge penalty rates on excess reserves, a proposal which Scott himself vigorously endorsed in 2009. So why doesn't he favor it now?

He seems to write as if NGDP targeting and negative rates (plus phasing out large notes) are mutually exclusive. But CB lite policies can surely be implemented in conjunction with an NGDP target. And as you point out, standard switching and price confusion aren't problems under CB lite.

since Miles started blogging I think Sumner probably retrenched to focus purely on NGDP targeting and the quantity of the base.

Probably so, but I still don't understand why. Sumner was bugging Krugman about negative rates before Kimball started blogging, so I don't see why he wouldn't join forces with Kimball on negative rates unless he changed his views.

I think your second strategy (closing the $100 window) is the most pragmatic compromise. Kimball's idea to completely eliminate paper money is DOA US (as you wrote, just eliminating the $100 would incur the public's wrath, imagine the shitstorm if the Fed went after all cash), and the crawling peg requires a UOA switch.

But to be honest, I don't hold much hope that anyone will endorse your idea (even Kimball--he'll still push for pure electronic money, I guarantee you). For all the arguing back and forth that goes on in the blogosphere, I rarely see anyone change their views and say, "Wow, that's a good idea! I'll add it to my toolbox." I guess it's an ego thing.

"He seems to write as if NGDP targeting and negative rates (plus phasing out large notes) are mutually exclusive. But CB lite policies can surely be implemented in conjunction with an NGDP target."

Agreed.

"...but I still don't understand why. Sumner was bugging Krugman about negative rates before Kimball started blogging, so I don't see why he wouldn't join forces with Kimball on negative rates unless he changed his views."

Another theory is that the market monetarist brand irrevocably hitched its cart to the monetarist obsession with the quantity of money. As a tool, interest rates "go mute," they like to say. Market monetarists associate interest rate policy with Keynesians. So it becomes an us vs them thing. Sort of silly. See for instance:

from https://thefaintofheart.files.wordpress.com/2011/09/market-monetarism-13092011.pdf

"Kimball's idea to completely eliminate paper money is DOA US (as you wrote, just eliminating the $100 would incur the public's wrath, imagine the shitstorm if the Fed went after all cash), and the crawling peg requires a UOA switch."

In fairness, Kimball doesn't support an elimination of paper money, just a crawling peg.

"I guess it's an ego thing."

People get attached to the ideas they create. Also, we only see the blogosphere side of these debates, not the academic side or the view from within central banks. It could be different there.

Maybe I'm missing something, but it seems strange to put such amount of time to come up with ideas how to destroy the free market.Personally I cannot wait for CBs to start implementing these suggestions as most of my savings are already in precious metals. :-)

Exactly why are you advocating the destruction of currency? Currency circulates in the nominal economy. Reserves only circulate among banks. Seems simplest to increase currency supply, not eliminate currency.

I am a nobody in the pantheon of economists; however, sometimes a nobody can see with a clarity unencumbered with baggage.

Thus, given that (monetary) inflation is nothing but the legalised theft of capital and it is the current inability of the authorities to impose this theft (for the purpose of increasing velocity of flow) in a deflationary environment that is the problem, how about instituting a Law to legalise the theft of capital in a deflationary environment?

We have seen this on a (forced) voluntary basis sometimes - it is called a "haircut".

Cash, being identified by serial number would be subject to a "haircut" (based upon the time since it was first issued) every time it was used in a transaction; there would thus be no point in storing it to avoid negative interest rates.

And the "haircut" is exactly equivalent with UOA's reduction in value in an inflationary environment; it is no more morally wrong than simple inflation.